Sabra Health Care REIT, Inc. (NASDAQ:SBRA) is trending up but the financial outlook looks rather weak: is the stock overvalued?

Sabra Health Care REIT (NASDAQ:SBRA) has had a great run in the stock market, with its stock rising 22% in the past three months. However, in this article, we have decided to focus on its weak fundamentals because a company’s long-term financial performance is what ultimately dictates market outcomes. Specifically, we decided to study the ROE of Sabra Health Care REIT in this article.

Return on equity or ROE is a key metric used to gauge how effectively a company’s management is using the company’s capital. In short, ROE shows the profit that each dollar generates in relation to the investments of its shareholders.

See our latest analysis for Sabra Health Care REIT

How is ROE calculated?

The return on equity formula is:

Return on equity = Net income (from continuing operations) ÷ Equity

So, based on the above formula, the ROE for Sabra Health Care REIT is:

1.3% = $43 million ÷ $3.3 billion (based on trailing 12 months to June 2022).

“Yield” is the income the business has earned over the past year. One way to conceptualize this is that for every dollar of share capital it has, the company has made a profit of $0.01.

Why is ROE important for earnings growth?

So far we have learned that ROE is a measure of a company’s profitability. We now need to assess how much profit the company is reinvesting or “retaining” for future growth, which then gives us an idea of ​​the company’s growth potential. Assuming everything else remains unchanged, the higher the ROE and earnings retention, the higher a company’s growth rate compared to companies that don’t necessarily exhibit these characteristics.

A side-by-side comparison of Sabra Health Care REIT earnings growth and ROE of 1.3%

As you can see, Sabra Health Care REIT’s ROE looks pretty low. Not only that, even compared to the industry average of 6.6%, the company’s ROE is quite unremarkable. Therefore, it may not be wrong to say that the 37% decline in net income over five years observed by Sabra Health Care REIT may have been the result of lower ROE. We believe there could also be other aspects that negatively influence the company’s earnings outlook. For example, the company has a very high payout rate or faces competitive pressures.

However, when we compared the growth of Sabra Health Care REIT with the industry, we found that although the company’s earnings declined, the industry saw earnings growth of 11% over the course of the year. same period. It’s quite worrying.

NasdaqGS: SBRA Past Earnings Growth August 22, 2022

Earnings growth is an important factor in stock valuation. The investor should try to establish whether the expected growth or decline in earnings, as the case may be, is taken into account. This then helps them determine whether the action is placed for a bright or bleak future. Is Sabra Health Care REIT Fairly Valued Compared to Other Companies? These 3 assessment metrics might help you decide.

Does Sabra Health Care REIT use its retained earnings effectively?

Sabra Health Care REIT has a very high three-year median payout ratio of 87%, implying that it retains only 13% of its earnings. However, it is not uncommon to see a REIT with such a high payout ratio primarily due to legal requirements. So that probably explains the decline in the company’s profits.

Additionally, Sabra Health Care REIT has been paying dividends for at least a decade, suggesting that management must have perceived that shareholders prefer dividends to earnings growth. After reviewing the latest analyst consensus data, we found that the company is expected to continue to pay out around 81% of its earnings over the next three years. Still, forecasts suggest Sabra Health Care REIT’s future ROE will hit 6.0%, even though the company’s payout ratio isn’t expected to change much.

Conclusion

Overall, Sabra Health Care REIT’s performance is quite disappointing. The company has experienced a lack of earnings growth due to the fact that it retains very little profit and what little it retains is reinvested at a very low rate of return. That said, looking at current analyst estimates, we found that the company’s earnings growth rate should see a huge improvement. For more on the company’s future earnings growth forecast, check out this free analyst forecast report for the company to learn more.

This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.

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